Up is Down?

So as I mentioned the other day that oversold volatility (bearish) was not as good a market signal as overbought (bullish). As per Rob at Quantifiable Edges, it is even worse than I thought.

Over the last 10 years, owning the S&P 500 when the VIX was more than 10% below its 10-day moving average was significantly more profitable on average than owning it when it wasn’t. Let me repeat that. Owning the S&P 500 when the VIX was more than 10% below its 10-day moving average was significantly more profitable on average than owning it when it wasn’t. To illustrate I ran a study:

Short the VIX on a cross of the lower 10% envelope of the 10-day moving average. Cover when it moved back above this envelope. From 5/98 until now there were 87 such trades. The average lasted just over 3 days. The S&P actually GAINED 91.09 points in the 272 days that this was in effect. That is an average of about 0.33 points per day. In the other 2,379 days the market only managed to gain 184.22 points – about 0.08 points per day. In other words, the market actually performed over 4 times BETTER when the VIX was stretched more than 10% below its 10-day moving average. Also, when this VIX-stretch was active the S&P made nearly 1/3 of its total gains in only 9% of the time.

Well that I would not expect. But to me the best way to look at an extended VIX is backwards. That is instead of using it as some sort of action signal, watch and see how the market reacts to the extended VIX. In bear trends for example, the rallies tend to peter out as the VIX gets oversold. In hindsight, a good clue that the intermediate trend was up was when the market did not sell off on an oversold VIX.

But if you are looking for better market signals, Rob does have some criteria.

So is the whole low VIX = complacency thing a fallacy? Not completely. Many times it will lead to a selloff. Here’s a system which demonstrates that. Again, last 10-years is the time period. 1) Short the S&P 500 when the VIX crosses from below to above the lower 10% envelope but remains below its 10-day moving average on a closing basis. 2) Exit the trade when the VIX closes above its 10-day moving average. Here you would have had 58 trades. The average trade would have made you about 7 S&P points and the total system gain, or S&P points lost, over the time period is 403.17 – a very substantial number.

To sum up - just because the VIX is “low” doesn’t mean the market is about to fall. In fact a good portion (about 1/3) of the S&P gains over the last 10 years have come under these conditions. When the VIX moves out of complacent territory and back towards its mean, then the market is susceptible to a decline.

Let It Rain

Not a whole lot of jawboning regarding the Subway Series this year. Pretty much our whiny, sleepy overpriced underachievers vs. yours. Someone will win 2 of 3, sports talk radio will blabber about how much it all means, and then move on.

I should rent this Embrace of The Vampire instead.

But hey, guess what, there is an arb involving both the Mets and Yankees.

Sell both on Tradesports to win their respective divisions.

OK, not recommending that, but each trades a bit above their theoretical values as per the numbers crunched at Baseball Prospectus.

BP runs 3 prediction models that play out the regular season a million hypothetical times and spit back the odds of each team winning their respective divisions and/or making the Wild Card. The best model imho is this ELO system.

Anyway, the results are here, and it gives the Mets and Yankees each about an 18% chance of winning their respective divisions. Pretty far off the markets as the Mets "trade" for about 48, while the Yankees change hands at about 24.

OK, guess the Mets are the bigger short, lol. Their price matches BP's Pecota odds, which simply base predicitons of the expected performance for each player going into the season. If the Mets were an option, they would be one of the long-dated variety that assumes some sort of mean-reversion upwards.

I am not quite as optimistic.

Fun and Gamma

Well, earnings season winding down a bit, but still a few interesting names to watch for. This, from Briefing.

Some names that jump out that have high implied volatility vs historical volatility (suggesting elevated expected stock movement) are CNTF, NCTY, PWRD, CSUN and SOLF... We'd note that these expectations are subject to change in the days leading up to the actual earnings release. additionally, there may be factors other than earnings driving volatility levels

I love this one here, Solarfun Powe Holdings (SOLF). No focus group could ever create a better name for a high octane momo stock than "Solarfun". Chines AND Solar, what could go wrong?

Volatility has made lower highs, but not unusual when the earlier highs are in the 160's. And all individual stock volatility trends down over time.

All things considered, options look way pricier heading into this number than at other times in SOLF's brief history.

.....Adding, this also from Briefing, fwiw.

We're seeing heavy buying in the XMSR June 11-12 strangle today, suggesting expectations for greater near-term volatility in the stock as the co awaits a decision from the FCC on its merger with SIRI... A total of 8390 Jun 11 puts have traded today vs. open interest of 1220, and 9597 Jun 12 calls have traded vs. open interest of 1520. The straddle is currently offered at 1.30 with the stock trading at 11.82. This means if bought outright and held until expiration, a straddle buyer would profit with XMSR above 13.30 or below 9.70 at June expiration (6/20). In the meantime, a straddle owner will benefit from increases in volatility levels, which drives options prices higher (all else equal)... XMSR is currently involved in the regulatory process of its pending merger with SIRI. The Dept. of Justice approved the transaction on Mar 24, but FCC approval still pending. Dow Jones reported on May 1 that the House Commerce Chair said the FCC will impose conditions on the merger... We are not seeing similar activity in SIRI options today. (OPTNX)

Quick Pin Refresher

Pins are most probable when open interest on a particular strike is high, and volatility is relatively low. But the low volatility in a way is more signficant. Volatility translates to an estimate of the daily range. If it is low, and a stock is already near a strike, then the likelihood becomes greater that it hovers near the strike anyway. Throw in option owners scrambling to offset their daily decay via flipping the stock around the strike and you have a self-fulfilling prophecy.

If the option owners are market makers, all the more chance they are in there flipping as they are far and away the most likely party to aggressively hedge.

And in a month that has seen volatility go one direction, down, we can surmise that specialists and market makers own major amounts of options paper.

So yada yada yada, expect more than average quantity of pins.

Volatility Chart Du Jour, FSLR

So that call I made the other day, the one about FSLR options on the cheap side? And if only FSLR could break free of the recent range, they would scream for some options?

Um, not so much.

Stock races through and the rush commences. Let's see who can sell volatility down the fastest.

This chart does not reflect the actual action in the Junes as the ATM's closed yesterday at a low 50's volatility.

A couple anecdotal observations about frothy sort of stocks like this. The stock lifts abate during upswings in volatility, not implosions. At least that is my experience. Right here right now the "obvious" trade is to go long some gamma, maybe long calls vs. short stock on a ratio. They tend to stop rallying however when that trade becomes difficult and the board makes you pay up.

More LEAPS

Just to clarify a couple things from earlier as Interleague play is upon us.

LEAPS and/or any option with lots of time left are very much a bet on future option volatility and not a particular bet on stock volatility. Buy them and you do not get much gamma, and thus not a whole lot of ammo to flip stocks. You will often see a directional move in your favor get offset by an unfavorable move in option volatility.

Consider long LEAP positions the last couple month's. Unless you had a pure directional bet on AND did not hedge much with stock, you did OK. But otherwise, the absolute pounding in volatility made it a very challenging trade.

Shorter term options are pretty much the opposite. Yes the volatility of the option can and does fluctuate and will cause your marks to bounce around. But for the most part, your bet is on the volatility of the actual stock, and how you manage it.

So if you are of a mind to buy options, think about the "bet" (or hedge) you want to make.

21 Days Since the Last Lawsuit.......

So go to Google and type in "The Dykstra Report", and the top two results lead you right back ....to The Daily Options Report.

Yeah, Baby.

But wait, someone has a paid search up above me. OMG! It's Nails on The Numbers.

Not a Subscriber of The Dykstra Report? Get in the game now and register here

Subscription Includes:

• Lenny's excluve Deep-in-the-Money picks every Monday, Wednesday & Friday
• Free bonus picks posted on TheStreet.com every Tuesday & Thursday
• Updates send directly to your Inbox prior to the market's open
• Print edition containing analysis and updated once a month
• The Stat Book Scorecard
• Rookies section and more

Yes, the good old Stat Book Scorecard. Best way to bat 1.000? Only include the winning trades.

But hey, as Lenny says, one win can pay for the whole year's subsciption. Which incidentally costs a low/low $995.

Note though, the last Dykstra Report turned out to be a fraud. A real fraud I mean, it wasn't actually even Lenny. So don't take random DEEEEEEP Call suggestions, the guy recommending them may not even be famous.

Viewer Mail: Special LEAP Edition

So got this question yesterday.

Correct me if I'm wrong, but the lack of volatility (ie. low VIX) has the greatest effect on the longest of options, yes?

So, in truth, we should be getting drunk and buying LEAPs here, no?

My answer is yes and no. On the LEAP part I mean, lol, I drink about the equivalent of a 6 pack per calendar year.

He is correct in that a LEAP will react more to any identical move in volatility than a shorter term option. Take the SPY for example, a June ATM option now has about a .18 vega, meaning that for every one point move in volatility, the option price will move 18 cents. A Jan09 LEAP however has about a .43 vega, or 43 cents for a 1 point move.

But here's the catch; volatility in LEAPS does not move nearly as much as near term options.

The upper chart shows normalized 30 day volatility in SPY, essentially what the VIX tries to capture. It has had about an 11 pt. drop, peak to trough, in the past 7 weeks. The lower chart is for normalized 6 month options (as long as ivol. let's me go) and the move there was more like 6.5 points peak to trough.

So net/net LEAP-ish options have indeed done worse in the volatility crunch than nearer ones, although keep in mind the nearer one's decay faster. Throw it all together and it's probably close to a wash.

But we're not here to talk about the past. What about going forward?

Well, believe it or not that move down in the longer option is way more extreme imho than the clipping in the nearer one's. Longer duration options rarely move this swiftly. Now of course they likely got overpriced in the March panic, but still......

The shorter the duration on an option, the more you are betting on actual stock volatility and the less on how the volatility of the option behaves. The longer the duration, the reverse. So if you feel stocks themselves are about to get volatile, near terms are better. If you just feel options got too cheap, you want to own LEAPS and the like.

Go......MARKET!

CNBC's Portfolio Challenge off to another flying start.

Due to technical difficulties related to currency trading, we have cancelled all currency transactions submitted throughout Monday, May 12th and currency trading is currently unavailable. All traders' currency allocations will be reset to $100,000 CNBC Bucks until currency trading resumes.

Hat tip collegetraderJason in the comments.

And back to the VIX.

16 full as I type, Roger Clemens might even touch it here. At the risk of belaboring the point, check out Sep options. The forward price (effectively the future price) suggests the market still expects the VIX to be 22 on September expiration day.

It is all about mean reversion, but as my insane friend Bill at VIX and More notes, "mean" is very tough to define.

Since much of the discussion of the VIX centers around 10 day moving averages, I thought I would zoom out a bit, pull up a VIX weekly chart, and look at some long-term numbers: the 40 and 200 week simple moving averages (click thru to see).

Logically, one might assume that most of the activity in the VIX would fall neatly in between the 40 and 200 week SMAs. Interestingly enough, that has rarely been the case historically. During the past five years, for instance, the VIX has traded in the range between the 40 and 200 week SMA less than 20% of the time, as the VIX has trended down, then back up.

At current levels, the VIX is near the halfway point between the 40 and 200 week SMA, perhaps partly due to some of the gravitational effect of mean reversion. While current levels of volatility appear to resonate as too low for some, a continuation of the bullish bounce off of the March lows should send the VIX back to the 200 week SMA – or even lower.

In sum, while long-term VIX mean reversion does have some analytical use, it is less reliable than the short-term mean reversion patterns that are more commonly utilized for trading.

The most common short term mean reversion indicator is the 10 Day MA. Any time the VIX gets 10% below (above) it's 10 Day MA, the VIX is considered oversold (overbought). By this definition, the VIX is oversold now, And since the VIX basically moves in opposition to the market, it suggests the market is overbought by this metric.

Now the caveats.

It is expiration week. Moves in motion tend to stay in motion. Anecdotally, that can last until about Tuesday of next week.

Also, oversold VIX does not provide as good an indicator as overbought. Outright Fear tends to lead to big turns, outright disinterest can just linger.

New Experts on Tap at RM

So what's hot on Wall Street? Famous Stock Pickers. I mean ask yourself this question, could Steve Smith hit a major league curve better than Lenny hit on some DEEEEEP calls?

Of course not.

You would much rather have a celebrity run your money than a professional in finance up in Game 6. The braintrust at TheStreet.com sees this and has some great plans in the offing. And we got our hands on them.

So exclusively here at the Daily Options Report, we present a sneak preview into the next batch of guru's coming to Booya Central.









Ted McGinley: If you grew up in the 70's and 80's and had a favorite sitcom, odds are Ted McGinley joined the cast within 2 years of cancellation. Yes, from Happy Days to Love Boat to Married With Children, find an indicator as successful as the McGinley short. He will translate that magic into some timely long term entry points in the solar and ag space.












Kid Rock: "Well I'm packing up my game and I'm a heading out East. Where real women come equipped with scripts and fake.....stock picks.Find a nest in the Dix Hills, chill like Flynt. Buy an old laptop, find a spot to pim........ I mean, make you some serious Mad Money."

War Emblem: Flamboyant, neat and single winner of the 2002 Kentucky Derby (not that there's anything wrong with that). Spends most of his retirement avoiding distractions and tending to his own portfolio and monitoring portfolios that look just like his.








George and Louisse Jefferson: As Arsenio once said, you get an automatic laugh anytime you use "Weezy from the Jeffersons" as a punchline. So just imagine her stock picking prowess. Sure she may technically reside in the great beyond.....





Troy McClure: "You may remember me from such savvy calls as "Your money is safe at Bear Stearns" and "Gotta love that Brocade at $200"

Deep Thought

It cost $65 to fill my wife's car yesterday. I have our health insurance renewal in front of me and it's like a 10% bump for less coverage than last year. Good thing we have no inflation.

A Quick Trading VIX Primer

The VIX estimates volatility on the SPX itself for the next 30 days.

VIX futures are a bet on where the that estimate will be on the day the future expires. In other words, it is a snapshot of what the market expects for volatility 30 days AFTER the future expires. If it is a September future for example, you are guessing how the market prices volatility 30 days forward from September expiration. You are not betting on SPX volatility between now and September, that is a common misconception.

VIX options are cash settled, meaning you get delivery of nothing, just a debit or credit. They are also European exercise, meaning you can't do anything other than trade them between now and expiraiton.

They price off the futures, NOT the VIX you see on the screen. And since futures carry premiums to the VIX when the VIX has an extended decline, VIX calls here look fat to the naked eye that only compares them to the "cash" VIX. The reverse is true when the VIX runs high; VIX calls can and do trade under parity and puts looked pumped.

Of course moves in the cash VIX have some effect on VIX futures and options, but the further out you go in time, the more limited that effect. Think of this weather analogy. A hypothetical October Weather future let's you predict the average temperature in Al Roker's 5 Day forecast on October 15th. Would an unseasonably warm or cold day today effect your prediction of his prediction? Not a whole lot. Same way a move in the "cash" VIX should not have much impact on your prediction where traders will price volatility looking forward in October.

So bottom line; trade VIX options and you are trading a derivative (the option itself) on a derivative (the VIX future) on an estimate of a derivative (the VIX itself is merely a statistically calculated estimate of a theoretical SPX option with 30 days until expiration).

Serve and Volley

OK, I will say it for the umpteenth time; don't play the VIX options unless you understand them. And even then, don't play them. They are an incredibly tricky product and not designed for anything the 99.9% of us who don't manage large derivatives desks really need.

I saw this in a comment in a Slope of Hope thread.

VIX , none of the JUNE options look they are priced right. Maybe next week VIX JUNE calls will be lower priced.

Trust me, I do not blame or seek to mock the commenter one iota for this. I saw essentially the same misconception from an options "expert" yesterday.

But no, VIX June options are priced correctly, they just align with the VIX June future, NOT the actual VIX. And they are European exercise.

Volatility always assumes mean reversion, often incorrectly. Right now, with options baked, mean reversion assumes the VIX goes higher. So ergo all VIX futures trade at premiums to the actual VIX. And since options price off the futures, all June calls seem too high to the naked eye, and all June puts seem too low.

Again, if you consider the market too high and/or volatility too low and want to fade "cheap" options into the morass, use options on actual stocks/indices/ETF's. My personal preference right now is something that expires in the Fall.

Something Suddenly Came Up......A Very Brady Linkfest

Some random links we secretly videotaped from opposing blogs.

• Value Plays wonders whether we see a little too much Buffett lately.
• As does Howard.
• Quantifiable Edges with the meaning of yesterday's low volume rally.
• A majority of whacky economists blame supply/demand, and not speculators, for booming energy prices (hat tip Trader Mike).
• I will reiterate my strong disagreement. We truly need to outlaw any speculation any time a market moves not exactly how we want it. I propose a system where 10 wise pundits tell us where everything should trade; that's the only hope we have for truly free markets.
• Roger on how to best capture a country (in ETF form).
• Slow week for Clemens news, but Straight From the Mut. has his hands on the next batch of revelations.
• Don Fishback with the pros and (mostly) cons of buying straddles/strangles ahead of earnings.
• Good prognosis for expiration week says Muckdog.
• Some names to watch from  upsidetrader
• And the Shark Report.
• Dinosaur Trader walks thru a good trade.
• BuyOnTheDip buying and buying the Visa dip.
• So, many moons ago, a firm called Timber Hill emerged on every exchange with  a proprietary system of color coded monitors that signaled their squad of (very poorly paid) traders to take action. We of course found humor in the screens and the fact they forced the employees to become automatons, and that an uptick in like Sugar volatility or whatever would suddenly force their traders to randomly buy options in Caterpillar and Apple et. al..
• Of course Timber evolved into Interactive Brokers and the founders are kajillionaires now, so who exactly got last laugh on that one? Zackstocks takes a look at IBKR. 

Jon Voight's Car

Would you buy a car just because some celeb. may have previously owned it? If so, you'll love following Heisman Trophy winners into the market.

Yes, I have peered into my crystal ball and seen the future of investing. And it involves advice from ex-athletes and catchphrases.

So Keep Moving the Chains, and please welcome the newest addition to the Street.com, football great Tim Brown.

But a little more than a week ago, Microsoft withdrew its bid for Yahoo!(YHOO). At the time, Microsoft CEO Steve Ballmer said he was withdrawing his firm's increased offer of $33 a share to acquire Yahoo! because Yahoo!'s management was looking for $37 a share. In my opinion, now is the time to grab Microsoft.

Even before the takeover talk, Microsoft was preparing a game plan to challenge Google(GOOG) in the online advertising game. Microsoft is well behind Google in this arena, but that means they have a lot of upside. Plus, Microsoft is way out ahead of Google in the display advertising market. That area should grow much quicker than search advertising, leaving Microsoft in good shape to take advantage of that trend. If you listen to Microsoft's execs, they are talking like they are the favorites in this matchup vs. Google.

Regardless of how it plays out, I am confident Microsoft is a great play today. You can ride it to a quick 10-yard first down, or go deep and take it in for a score.

Well, on the Nonsense Continuum we have a step forward here. No Deep calls and no cutting and pasting the Yahoo Finance description of Microsoft for all ten people on Earth who are unfamiliar with the company.

But very Cramerican call methodology. Stock picks with such mundane considerations as time frames, targets and outs are a tad more useful than ones with corny football analogies.

Fear Not

Yes folks, the VIX has crossed below 18 and can no longer vote. Next stop, the Miley Cyrus-Roger Clemens "friend" zone.

Jason Goepfert of Sentimentrader had this observation on Minyanville yesterday.

I checked for any other time since 1990 that the VIX hit a six-month low, while the S&P 500, on which the VIX is based, was still at least 1% below its own three-month high. That would show us times when traders were assuming a low-volatility environment despite prices that might not justify that assumption.

Returns in in the S&P 500 going forward were substandard (and negative) going out as far as two month's. From one to ten days out, the S&P was positive less than 45% of the time, and showed an average return that that varied between -0.1% and -0.8%. Not a huge negative edge, but certainly less than random.

.....In the last bear market there were two pockets of concentrated readings like this, and both led to very poor performance going forward, which is no surprise. Those were in early and late June 2001, and again in mid-March 2002.

Kind of jibes with my own opinion that we sit in a similar stage of the market as we did in the spring of 2001. Just substitute tech for financial. They proclaimed the coast pretty clear. Stocks churned up, but below the downtrending 200 Day MA. And volatility tanked. Sound familiar?

Now in all fairness, option volatility has no reason to lift right now. Stocks themselves remain range bound and move within those ranges at the pace of a snail. But that in an of itself suggests complacency too.

Tell Me Why I Don't Like Monday's

Just some things to keep in mind regarding our ever-pathetic volatility.

*Real* volatility can do whatever on any day of the week. But statistically, Monday's should see a lift in the VIX more often than not. Traders lower option bids on Friday afternoons ahead of weekend decay and thus cause a statistical decline at the end of the week. (again not a *real* decline). That effect gets reversed on Monday. In other words, it is 2 3/4 calendar days since we last convened, but options priced in some of that 2 3/4 days of decay in anticipation ahead of time. So thus Friday options close artificially cheap in volatility terms, and then open artificially higher on Monday, all things being equal.

The only real implication of that is that when you see a red VIX on a Monday, just know that reflects even uglier options behavior than meets the eye.

Also remember that depressed volatility has implications beyond whether you ever touch an option. You can (and should) trade greater size in low volatility backdrops. And can (and should) couple that with tighter stops and tighter targets.

And remember how John Candy became conversant in Swedish in Splash? Same idea here in the above video on peak oil, lol, you can become an expert on the topic without knowing why. Hat tip Wall Street Fighter.

How About Those Calendars?

I feel terrible that the Eagles have played great ball for like a decade now and never won the Big One, while the Giants get hot for one month and take home Super Bowl trophy number 3.

Did I mention they also beat a team going for a 19-0 record?

But whatever, not here to rub in the past. What are Giants cheerleaders doing for the environment?

What's that you say, they don't actually employ cheerleaders.

Well, whatever, the Eagles do, and they are using all their powers of .....um.....no comment, to help save the environment. This, via With Leather.

The Eagles Cheerleaders annual calendar has been widely known for its cutting-edge concepts and style [like that one year, when they... uh... wore bikinis -Ed.], and this year it’s Going Green. The 38 bio-licious women on the squad will be wearing bikinis made of 95% organic cotton and recycled plastic soda bottles as well as jewelry and accessories made from bamboo and other recycled, upcycled and repurposed products such as CDs, computer chips, glass, cable wire, candy wrappers and watch parts.

So any interest in an awkward segue into calendar spreads, the options kind?

Still like them, still think it is the right position in general now. I would note though I have an unoriginal thought with this, at least as far as the market is concerned. Time is skewed up for the most part, meaning the further out you go, the higher the volatility you pay.

So Mr. Market basically assumes that the current blahs will continue into summer, but better times (at least as far as volatility goes) await in the Fall. That poses two risks of course. One is that we heat up sooner. No one seems to expect that through June expiry at least.

The other risk is that this declining volatility regime stays with us for longer than we expect.

Summer fireworks seem more likely to me to bust this trade then permanently lower volatility (if the trade does in fact turn out poorly). But only time will tell.

Deep Thought

Let's outlaw speculation in commodities so the "Free Markets" can *work. Go Capitalism!

Go Green

Going to celebrate Earth Day here today because......well, stumbled on a couple pics and such.

For example, this is just an awesome idea, via Treehugger.

Treehugger readers seem to love photos and posts about sexy underwear and bikinis--so let’s try this one--a solar powered bikini. Whilst lying in the sun and baking, you can charge up your cell phone, ipod and digital camera. It comes with a USB drinks cooler—once plugged in it will act as a chiller for your can of organic lemonade. The photovoltaic film panels allow a fashionable fit while supplying the 6.5 volts.

So what's the worst thing that can happen to volatility? A range breaking out. FSLR seems like it halves or doubles every momth, but not so much in April/May as it has churned between 260 and 300. And volatility has gotten clubbed.

Now yes, it still sits around 60, and throw that on a high priced stock and you get some real high prices in dollar terms on the board.

I strongly doubt a stock like this ever finds true equilibrium, so I would like to buy some time here in the options. Couple probs though; the dollar price tag I mentioned above is tough, you really have to mentally divide everything by ten to get it human. And the markets are wide as can be if you go beyond near month.

And the Winner Is....

I mentioned last week Briefing runs lists of options that deviate importantly from their historical volatility.

What I was trying to say is highlighting the disconnect implies there's some sort of edge when there's this disparity. And generally there's a reason for the pricing. That's not edge so much as it's a bet as to whether the options fully price in the magnitude of a move or not.

But hey, guess what, they also run followups to the lists. My bad.

Like this one here that wraps up the week.

Everyday we highlight stocks with heightened near-term implied volatility relative to historical volatility that indicate option market expectations for greater future price movement in the stock (posted under ticker OPTNX - see today's comment). The increase in implied volatility suggests greater demand for the options, which could be due to any number of known reasons (upcoming earnings, FDA meetings, analyst meetings, etc), or unknown (non-public) reasons. Implied volatility levels rise as demand for the options increases, which is what tends to happen ahead of volatility events. The purpose of the comment is to provide a list of stocks exhibiting this, suggesting they are likely to see tradable volatility events or catalysts in the near future... As a follow-up to this week's comments, we have reviewed some names that we pointed out on the list that ended up seeing large swings: YHOO (dropped as much as 25% after MSFT withdrew its offer to acquire the co), BIDZ (traded down ~12% despite beating estimates), MFLX (spiked almost 20% after beating estimates by $0.14), ALVR (climbed over 30% this week following Q1 earnings and Q2 guidance), AOB (traded 15% higher following Q1 results and issuing upside FY08 guidance), CLWR (saw notable swings this week; stock spike over 20% following announcement the co and S entered into a definitive agreement to combine their wireless broadband businesses to form a new wireless communications co; note CLWR volatility remains elevated and is expected to report earnings next week), DRS (gapped up ~15% following WSJ report that Italy's Finmeccanica in talks with DRS, which the co later confirmed that it is in discussions contemplating a potential strategic transaction), BRL (gapped down over 20% after missing Q1 estimates by $0.22 and guiding FY08 revs down), KALU (traded down 10% following Q1 results

The big dividing line sits between the overbid options where we know why, and those where we don't. Briefing runs an Unusual Activity screener as well that seeks to parse out names where the explanation is unknown.